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Best Practices and Tools to Grow Your Business
Best Practices and Tools to Grow Your Business

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Final RRSP Contributions – the last chance to save some tax?

Executive Summary

Almost all of your clients will have heard of some scheme to save money, but the details will be cloudy, the steps indistinct, and the pitfalls unknown.

They will approach their Advisor with vague instructions to “over-contribute, withdraw, pay a penalty”.

Once an RRSP is closed (i.e. converted to a RRIF) no further contributions can be made.  So in a client’s final year of owning an RRSP (someone born in 1944, turns 71 in 2015, and must convert their RRSP by December 31, 2015), where they have earned income that produces RRSP room in the subsequent year, they will have no RRSP to contribute to!

Declare defeat, tell your clients that CRA has won, yet again!  Or get ahead of the December 31st deadline, follow CRA’s rules, and find some tax savings for your clients.

This strategy is for clients who are creating their RRIF by transferring their funds from their RRSP; not 71 year-olds.

There is an additional benefit too:  If your client’s income is high enough, the RRSP contribution can be used at a later date to reduce the clawback of OAS benefits.

The Details

Before your clients close their RRSP, they should be encouraged to take every available contribution opportunity.  Each contribution reduces their taxable income, and if it exceeds the OAS limit, a savings of 15% “tax” in the form of a benefit clawback on each dollar of the limit is achieved.

The fancy footwork is as follows:

While your clients RRSP is still open (before conversion to a RRIF at age 71, or earlier) have them utilize all of their unused room AND make an over-contribution
The amount of the over-contribution should be the RRSP room expected to be created from earnings in the final year of the RRSP. So; the RRSP over-contribution made in December of 2015, should be equal to the amount of RRSP room created by the tax year of 2015.
The limit is 18% of taxable income up to a maximum of $24,930 for 2015
The over-contribution (in excess of $2,000) will generate a 1% per month penalty, and will disappear after one month in January 2016 when the income of 2015 is utilized to calculate 2016 RRSP room.
This income reducing deduction can be used immediately in 2016, in this example, or any subsequent year when it makes the most sense to do so.
A person earning $100,000 of eligible income in 2015 once all of their other RRSP room is used should over-contribute $18,000 in December, just prior to the closing of their RRSP. That is, $100,000 x 18% = $18,000.  In January the over-contribution disappears because of their income in 2015, and they will pay a 1% penalty of $160 ($18,000 - $2,000 grace amount x 1% = $160)
The tax savings on the RRSP contribution is $6,140 ($18,000 x 35% marginal tax rate = $6,300 less the $160 penalty)
In this example the individual exceeds the income limit for OAS of $72,809 by $27,191. The $27,191 would have a clawback of 15% or $4,078.  With the $18,000 over-contribution used to reduce income in that year the clawback would be reduced by $2,700 ($18,000 x 15%)
In this illustration, this taxpayer saves $8,840 ($6,140 + $2,700)!
That $8,840 savings should go a long-way to convince your clients of your value.

Key Factors to Know

Using all of the unused room is the first step for your clients who are about to close their RRSPs.  Once that has been achieved, and they have earned income that will generate RRSP room in subsequent years, they are candidates for the over-contribution strategy.

In the current low interest rate environment, a case could be made to borrow funds to exhaust unused room, but borrowing to invest is a complex decision, and not for all, so it should be left for another discussion.

And again, the RRSP deduction can be used when it is most advantageous to the tax payer.

The Bottom Line

This strategy should be coordinated with your clients accountant, especially for those who will be earning in excess of the OAS limit, and will generate a clawback.  In those cases the savings from over-contribution can be tremendous.  Even more than the straight strategy alone.
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It's been a long time coming.  But that's the way it always seems when building a new website.  I love to hear your feedback.  Please take a look at www.advisorresearchgroup.ca  

This site has a better flow and search engine making it easier to find information.  Check it out at our Resource Center tab.

And more importantly; our reports now come with much more client-ready material, presentations, letters, client invites, and any other tools that you can utilize to speed up and improve all of your research and client communication needs!

We are still transitioning our past reports over and there are still a couple areas that need adding too, spelling and grammar checks to review, etc... But if anyone has been involved in this process, the eagerness to show-off your new services will always outweigh the feeling of waiting till everything is perfect (is it ever perfect in your own eyes anyway?)...

Cheers,
Dane
Advisor Research Group | Home
Advisor Research Group | Home
advisorresearchgroup.ca
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In the summer of 2015 Money Sense is rolling out a media backed Accreditation for Canadian Financial Advisors. Do you feel this will add value to your personal brand by increasing your client base and increasing client retention?
http://www.moneysense.ca/planning/moneysense-approved-a-new-marketing-service-for-financial-advisors
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No, this will only confuse prospects
Any new Accreditation is a good one!
No, this is a gimmick.
I'd like to know more about this
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Yes, I think Canadians trust MoneySense.
0%
No, this will only confuse prospects
0%
Any new Accreditation is a good one!
0%
No, this is a gimmick.
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Life is about choices. Keeping your clients best interest top of mind will ultimately garner professional integrity. In turn, you will receive the best referral advertising money can buy...Word of mouth!
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Have you ever done a self-assessment?

Many Independent financial advisors have little to no mentor-ship whether it comes from a boss or more experienced colleague.  If you want to improve and build your practice don't forget to measure the one thing that matters most in terms of efficiency and effectiveness; you.

The Advisor Research Group has developed a comprehensive tool for just this.  Email  me or touch base through LinkedIn and I will be happy to send you this tool for free.
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The best 2014 CRM packages for Independent Financial Advisors!!!

If you work in a small shop and/or on your own, there are great options in terms of Customer Relation Management tools freely available to you. We put together a list of the top CRM software packages currently available for 2014.

Request the full report by emailing: info@advisorresearchgroup.com with subject line: CRM please!

About us: less http://lnkd.in/dTfxw2Wless
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Start a Chain Reaction: Growing a Clientele Using Referrals

Although the top financial advisors list referrals as their number one way to increase business, many still shy away from this approach. Whether out of fear or lack of effort don’t let this very important method of building your business get pushed to the side.

Visit the following to request this report:
http://www.advisorresearchgroup.com/resources-recent.html
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Social Media Tools and Tips You Need to Know About

As social media begins to gain more and more momentum in the Financial Advisor arena, many planners see it as an added task that will take them away from their main focus; prospecting and retaining happy clients.

Click here:   https://www.advisorresearchgroup.com/resources-recent.html to receive full report
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